Grading My 2016 Predictions

Almost a year ago I made my 2016 energy predictions (see “My 2016 Energy Predictions.”) I have been making annual predictions for nearly a decade now, primarily as a framework for sharing my views on energy markets in the coming year. I try to make predictions that are specific, measurable and actionable. I prefer not to leave anything open to interpretation or spin. With few exceptions, at the end of the year a prediction is right or it is wrong.

I try not to make “no-brainer” predictions. When I make these calls, there is a fair level of uncertainty around them.

Although I had one high-profile miss this year, the others were mostly correct. Here they are, along with commentary on each.

1. U.S. oil production will suffer an annual decline for the first time in eight years.

This was the closest to a “no-brainer” of any of my predictions. When I made it, I indicated that I had the highest confidence level that this one would come true. In fact, oil production started to decline in 2015 (even though 2015 annual production was still above the 2014 total), and the only thing that I thought would have turned it around was an early 2016 surge in oil prices.

Instead, oil prices weakened further in the first quarter, and the production decline that began in April 2015 continued throughout 2016. Between January and September of this year production fell by more than 600,000 barrels per day (bpd). Since September, production has trended back up, but is still well below the 2015 average of 9.4 million bpd. Final numbers won’t be released by the Energy Information Administration (EIA) for a couple of months, but based on monthly data through September and the weekly reports released by the EIA, 2016 oil production is going to come in at about 8.8 million bpd.

So this prediction was totally correct.

2. The closing price of the front month West Texas Intermediate (WTI) crude contract will reach $60/bbl in 2016.

I noted when I made this prediction that it was extremely aggressive. When I made the prediction the front month contract for WTI traded at $36.14/bbl, and no front month contract during 2016 traded above $43.73/bbl. Thus, this prediction would require a gain of 66% to be correct.

Given the aggressive forecast, I also said when I made the prediction that I would grade this one on a curve, and would only consider it a failure if WTI failed to crack $50/bbl. The front month contract for WTI closed the year at nearly $54/bbl, and traded up to $55.44. The price has risen about 50% since I made that prediction. Not a perfect prediction, but directionally right for a very aggressive prediction made at a time many were forecasting no price recovery in sight. If you made a bet on rising crude prices, you won that bet.

This one wasn’t perfect, but it was mostly correct.

3. U.S. natural gas production will suffer an annual decline for the first time in 11 years.

While U.S. natural gas production set another record in 2015 — the 10th straight annual increase — my reasoning was that low prices would finally dent output. More people challenged this prediction than any other, with some assuring me I was underestimating the resilience of the Marcellus shale. I wasn’t.

So what happened? Production stayed above the year-ago levels until March, but since then has been down year-over-year every month. Production in 2015 was a record 74.1 billion cubic feet per day (Bcf/d). Through September, that has fallen to 72.9 Bcf/d. By early December, the weekly numbers had fallen to below 72 Bcf/d, so 2016 natural gas production will indeed be below 2015’s record, snapping a 10-year streak of gains. This (along with a cold winter thus far) has helped natural gas prices recover from the lows of earlier in the year.

The Energy Select Sector SPDR ETF represents the largest energy companies in the S&P 500. Its top holdings include supermajors like ExxonMobil and Chevron, and large shale oil producers like EOG Resources and ConocoPhillips. It is a good index for conservative investors of large-cap energy companies.

When I made this prediction I noted that fundamentals would ultimately win out, and that the energy sector’s prospects should start to improve before the end of 2016. Indeed they did. Rising oil and gas prices helped the XLE rise by 15% by mid-year, and at year-end it had risen 25% for the year. I full expect more gains in 2017.

This one was completely correct.

5. Hillary Clinton will win the 2016 presidential election.

Sometimes the reasoning behind a prediction turns out to be as important as the prediction itself. It is possible to get a prediction wrong, but the logic behind the prediction helps to inform decisions about the market.

That was not the case here.

My reasoning was that Clinton would beat Sanders in the Democratic primaries, which she did. And that the Republican nominee would have enough negatives to end up outpolled. Ironically, that also came true as Clinton won the popular vote by nearly 3 million votes. But we don’t elect on the basis of popular vote.

Still, I believe (as polling guru Nate Silver has also attested) that Clinton would almost certainly have won had FBI Director James Comey not put his thumb on the scale 10 days before the election. There were a number of factors leading to her loss, but that one was huge. Her poll numbers dropped steeply just before the election and never recovered. I can rationalize that my instincts on this were mostly correct, but were likely undone by an unprecedented move by the FBI director.

But none of that matters. This is a binary prediction, either right or wrong. There is no “almost” in such a prediction. What matters is that the purpose of the prediction was to predict energy policy, and getting it wrong means that energy policies are going to go in a vastly different direction than I expected. At the end of the day, all that mattered was that it was wrong.

So even though I believe the logic of the prediction was entirely defensible, this one was 100% wrong.

Conclusions

Despite the high-profile miss on the presidential election, my instincts proved to be completely or mostly right on the other four predictions. Falling oil and gas production, rising oil prices, and a recovering energy sector were all major themes that played out during the year. Next week I will attempt to guess what we may see in 2017.

Good job once again, RR. These predictions are always entertaining and educational. I bought some XLE last December, a bit too early, but it has worked out well. Looking forward to the 2017 predictions.